Ecommerce is becoming a huge part of how Americans shop and do business today. Some might say that it is slowly supplanting brick and mortar retail options. Therefore, if your business isn't taking advantage of relevant e-commerce avenues, then you're probably doing yourself a disservice. Getting into online selling is not a difficult endeavor. You do however want to make sure that you have all your bases covered especially when it comes to tax requirements and codes.
Particularly in terms of online reselling, the market is opening up daily and there's plenty of room for new companies to come in and participate. Reselling is when a retail shop sells products online that they don't make themselves but rather purchase elsewhere. While this may seem an easier way to go, there are certain requirements that you need to be aware of as far as reselling is concerned. And procuring a resale certificate is a critical step for several reasons. In this article, we discuss the importance of resale certificates and examine why your business may want to get one.
Resale Certificates – Are They Necessary?
Essentially what a resale certificate does is to make it so that when you do purchase products from someone else to resell those products, you become exempt from paying local sales tax. So for example, let's say you buy wholesale items and then list them for sale within your online store. By presenting a copy of your resale certificate to the wholesaler in question, you forego having to pay the local sales tax on whatever items you purchase. You do though have to collect sales tax from the consumers to whom you sell the products.
The certificate itself is fairly straightforward: buyer's name and address, the reseller's permit number, a list and description of the products involved, and an indication that the products you're purchasing will be resold.
A resale certificate is beneficial for several reasons; by not having to pay your state sales tax, you thus have more money to spend on products. You may consider then buying in bulk as this could lead to deeper discounts. It is a win-win.
Resale Certificates versus Sales Tax Permits
The two are very similar. A resale certificate is a form of sales tax permit. The state in which you live will dictate what you need, whether just one or both of these documents. Some states, for instance, don't have any sales tax—in this instance, you would need both to use your reseller permit.
Also keep in mind that sales tax permits are used across the board, so they are good for all relevant transactions. Whereas with a resale certificate you are going to have to have one for each unique seller.
Getting a Resale Certificate
You must begin with the state in which you have your physical address. That means that if your business was incorporated somewhere else, you'd default to the state in which the actual business is now located and running.
Once you do receive your tax exemption document, the state will send you statements on either a quarterly or monthly basis. Remember that for each wholesaler with whom you engage, you need a new certificate. Plus, if you're operating in multiple states then you would need to follow the applicable regulations as far as tax exemption within the states you're transacting business.
As far as how long your resale certificate is good for, this again is state-dependent. In some areas, it is good forever, while in others there is a mandatory renewal required.
Resale-Certified Customers
Always remember that it is your responsibility to collect sales tax from your customers when/where applicable. Failure to do so can result in serious fines and penalties. How should you handle it when presented with a resale certificate? Below are a few tips to help ensure that you do the right thing when it comes to working with resellers.
1. Authenticate the Certificate - Go online and check the status. Virtually every resale certificate can be verified via an online search. You will be able to look up the certificate number and date. This way you know that it is authentic.
2. Is the Certificate Is Filled Out Completely - Check to make sure all the I's are dotted and T's crossed. Are their name and address on there? All relevant numbers and dates?
3. What is the Reseller's Intent - Come audit time, you want to ensure that everything was done properly and following protocol. By investigating the reseller's intent, you show that you did your due diligence.
4. Keep the Certificate on File - Treat this as you would an important tax document. And keep it for a minimum of five years. If in fact, you do have to go through an audit, you'll have peace of mind knowing that you have the certificate in question and can produce a said document when asked. You may consider giving it to your accountant or tax attorney for safekeeping.
Resale Certificates for Ecommerce
The process of getting that resale certificate is not a difficult one, regardless if you're a brick and mortar business or strictly e-commerce. Having one on hand can certainly help your business—in terms of spending power, in terms of compliance and in terms of getting you more favorable terms with wholesalers for instance. The state tax codes are not easy to process and understand, trust us we understand But this is one thing you can do relatively easily. Also, talking to an accountant might be a smart move if you do have any confusion regarding state tax codes.
At First Union, we have helped many e-commerce businesses. Call today to find out how we can better your business.